**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-Q**

 

**QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended December 31,2005**

 

**CommissionFile No. 1-13453**

 

**CRUZANINTERNATIONAL, INC.**

(Exactname of registrant as specified in its charter)

 
| **DELAWARE**                                                                       |   | **59-1284057**                   |
|------------------------------------------------------------------------------------|--------|----------------------------------|
| (State  or other jurisdiction of  incorporation or organization)                   |   | IRS  Employer Identification No. |
|                                                                               |   |                             |
| **222  Lakeview Avenue, Suite 1500, West Palm Beach, FL**                     |   | **33401**                        |
| (Address  of principal executive offices)                                          |   | (Zip  Code)                      |
|                                                                               |   |                             |
| Registrant’s telephone  number, including area code:  **(561) 655-8977** |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months, and (2) has been subject to such filing requirements for the past90 days.

 

Yes   ý          No  o

 

Indicate by check markwhether the registrant is a large accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

 
| Large accelerated filer    o |   | Accelerated filer    o |   | Non-accelerated filer   ý |
|----------------------------------------|--------|----------------------------------|--------|------------------------------------------|

 

The number of sharesoutstanding of registrant’s Common Stock, $.01 par value per share, as of February 3,2006 was 6,748,992.

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

 

Yes   o          No ý

 

 

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CRUZAN INTERNATIONAL, INC.

 

INDEX

 
| ** **   | ** **            | **Page  No.**                                                                               | ** ** |
|--------------|-----------------------|---------------------------------------------------------------------------------------------|------------|
| PART I  | FINANCIAL INFORMATION |                                                                                        |       |
|         |                  |                                                                                        |       |
|         | Item 1                | Financial Statements                                                                        |       |   |
|         |                  |                                                                                        |       |   |
|         |                  | Consolidated Balance Sheets -                                                               | 1          |   |
|         |                  | December 31, 2005 (unaudited)  and September 30, 2005                             |       |   |
|         |                  |                                                                                        |       |   |
|         |                  | Consolidated Statements of  Operations -                                                    | 3          |   |
|         |                  | Three Months Ended  December 31, 2005 and 2004, unaudited                              |       |   |
|         |                  |                                                                                        |       |   |
|         |                  | Consolidated Statements of  Cash Flows -                                                    | 4          |   |
|         |                  | Three Months Ended  December 31, 2005 and 2004, unaudited                              |       |   |
|         |                  |                                                                                        |       |   |
|         |                  | Notes to Consolidated Financial  Statements                                                 | 6          |   |
|         |                  |                                                                                        |       |   |
|         | Item 2                | Management’s Discussion and  Analysis of Financial Condition and Results of Operations | 11         |   |
|         |                  |                                                                                        |       |   |
|         | Item 3                | Quantitative and Qualitative  Disclosures About Market Risk                                 | 18         |   |
|         |                  |                                                                                        |       |   |
|         | Item 4                | Controls and Procedures                                                                     | 18         |   |
|         |                  |                                                                                        |       |   |
| PART II | OTHER INFORMATION     |                                                                                        |       |
|         |                  |                                                                                        |       |   |
|         | Item 1                | Legal Proceedings                                                                           |       | * |
|         |                  |                                                                                        |       |   |
|         | Item 2                | Unregistered Sales of  Equity Securities and Use of Proceeds                                |       | * |
|         |                  |                                                                                        |       |   |
|         | Item 3                | Defaults Upon Senior  Securities                                                            |       | * |
|         |                  |                                                                                        |       |   |
|         | Item 4                | Submission of Matters to a  Vote of Security Holders                                        |       | * |
|         |                  |                                                                                        |       |   |
|         | Item 5                | Other Information                                                                           |       | * |
|         |                  |                                                                                        |       |   |
|         | Item 6                | Exhibits                                                                                    | 20         |   |
|         |                  |                                                                                        |       |   |
|         | Signatures            | 21                                                                                          |       |

 

----

* Item is omitted becauseanswer is negative or item is inapplicable.

 

----

 

CRUZANINTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

 
| ** **                                       | ** ** | **December 31,** | ** **  | **September 30,** | ** ** |
|--------------------------------------------------|------------|-----------------------|-------------|------------------------|------------|
| ** **                                       | ** ** | **2005**              | ** **  | **2005**               | ** ** |
| ** **                                       | ** ** | **(Unaudited)**       | ** **  | *****                  | ** ** |
| ASSETS                                           |       |                  |        |                   |       |
|                                             |       |                  |        |                   |       |
| CURRENT ASSETS                                   |       |                  |        |                   |       |
| Cash and cash equivalents                        |       | $                     | 4,811,918   |                   | $          | 3,565,282 |   |
| Short-term investments                           |       | 219,257               |        | 219,994                |       |
| Trade receivables                                |       | 19,516,187            |        | 22,657,463             |       |
| Other receivables                                |       | 4,476,975             |        | 2,958,822              |       |
| Inventories                                      |       | 32,659,122            |        | 31,282,808             |       |
| Notes receivable, current maturities             |       | 555,088               |        | 597,976                |       |
| Deferred income taxes                            |       | 1,779,000             |        | 1,650,000              |       |
| Other current assets                             |       | 2,815,658             |        | 2,637,185              |       |
| Total current assets                             |       | 66,833,205            |        | 65,569,530             |       |
|                                             |       |                  |        |                   |       |
| LONG-TERM INVESTMENTS AND RECEIVABLES            |       |                  |        |                   |       |
| Investments in and advances to equity  investees |       | 2,552,309             |        | 2,514,807              |       |
| Notes receivable, less current maturities        |       | 512,614               |        | 555,252                |       |
|                                             |       | 3,064,923             |        | 3,070,059              |       |
|                                             |       |                  |        |                   |       |
| PROPERTY AND EQUIPMENT                           |       | 99,282,234            |        | 99,299,694             |       |
| Less accumulated depreciation                    |       | 62,227,606            |        | 61,016,561             |       |
|                                             |       | 37,054,628            |        | 38,283,133             |       |
|                                             |       |                  |        |                   |       |
| GOODWILL                                         |       | 20,524,404            |        | 20,524,404             |       |
| TRADEMARKS                                       |       | 881,127               |        | 904,304                |       |
| DEFERRED LOAN COSTS                              |       | —                |        | 260,609                |       |
| DEFERRED INCOME TAXES                            |       | 4,091,500             |        | 3,007,000              |       |
| OTHER ASSETS                                     |       | 2,172,268             |        | 2,130,089              |       |
|                                             |       | $                     | 134,622,055 |                   | $          | 133,749,128 |   |

 

----

*From audited financial statements.

See Notes to ConsolidatedFinancial Statements.

 

----

 

CRUZANINTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

 
| ** **                                                                                                                                                          | ** ** | **December 31,** | ** **  | **September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|-------------|------------------------|------------|
| ** **                                                                                                                                                          | ** ** | **2005**              | ** **  | **2005**               | ** ** |
| ** **                                                                                                                                                          | ** ** | **(Unaudited)**       | ** **  | *****                  | ** ** |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                           |       |                  |        |                   |       |
|                                                                                                                                                                |       |                  |        |                   |       |
| CURRENT LIABILITIES                                                                                                                                                 |       |                  |        |                   |       |
| Current maturities of long-term debt (with  stockholder)                                                                                                            |       | $                     | 38,000,000  |                   | $          | — |   |
| Accounts payable                                                                                                                                                    |       | 9,081,715             |        | 12,946,544             |       |
| Accrued expenses                                                                                                                                                    |       | 5,350,847             |        | 7,217,927              |       |
| Total current liabilities                                                                                                                                           |       | 52,432,562            |        | 20,164,471             |       |
|                                                                                                                                                                |       |                  |        |                   |       |
| LONG-TERM DEBT, less current maturities                                                                                                                             |       | —                |        | 28,600,000             |       |
|                                                                                                                                                                |       |                  |        |                   |       |
| OTHER LIABILITIES                                                                                                                                                   |       | 1,577,026             |        | 1,332,379              |       |
|                                                                                                                                                                |       | 54,009,588            |        | 50,096,850             |       |
|                                                                                                                                                                |       |                  |        |                   |       |
| STOCKHOLDERS’ EQUITY                                                                                                                                           |       |                  |        |                   |       |
| Preferred stock, par value $.01 per share;  authorized 2,500,000 shares;  no shares issued                                                                          |       | —                |        | —                 |       |
| Common stock, par value $.01 per share;  authorized 10,000,000 shares; issued 6,848,192 shares  December 31, 2005 and 6,847,256 shares September 30, 2005 |       | 68,482                |        | 68,473                 |       |
| Additional paid-in capital                                                                                                                                          |       | 43,516,304            |        | 43,393,682             |       |
| Retained earnings                                                                                                                                                   |       | 37,765,461            |        | 40,927,903             |       |
|                                                                                                                                                                |       | 81,350,247            |        | 84,390,058             |       |
| Less cost of 99,200 shares of treasury  stock                                                                                                                       |       | (737,780              | )           | (737,780               | )          |
|                                                                                                                                                                |       | 80,612,467            |        | 83,652,278             |       |
|                                                                                                                                                                |       | $                     | 134,622,055 |                   | $          | 133,749,128 |   |

 

----

*From audited financialstatements.

See Notes to ConsolidatedFinancial Statements.

 

2

----

 

CRUZANINTERNATIONAL, INC.

CONSOLIDATEDSTATEMENTS OF OPERATIONS

(Unaudited)

 
| ** **                                   | ** ** | **Three Months Ended December 31,** | ** ** |
|----------------------------------------------|------------|------------------------------------------|------------|
| ** **                                   | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
|                                         |       |                                     |       |   |   |
| Sales                                        |       | $                                        | 34,348,191 |   | $ | 30,181,243 |   |
| Less excise taxes                            |       | 5,901,687                                |       | 5,989,050 |   |
| Net sales                                    |       | 28,446,504                               |       | 24,192,193 |   |
|                                         |       |                                     |       |   |   |
| Cost of goods sold                           |       | 21,746,198                               |       | 16,117,201 |   |
| Gross profit                                 |       | 6,700,306                                |       | 8,074,992 |   |
|                                         |       |                                     |       |   |   |
| Selling, general and administrative expenses |       | 10,281,002                               |       | 8,306,010 |   |
| Operating (loss)                             |       | (3,580,696                               | )          | (231,018 | ) |
|                                         |       |                                     |       |   |   |
| Other income (expense):                      |       |                                     |       |   |   |
| Interest income                              |       | 28,700                                   |       | 98,019 |   |
| Interest expense                             |       | (853,728                                 | )          | (592,668 | ) |
| Equity in income of equity investee          |       | 37,502                                   |       | 32,291 |   |
| Other, net                                   |       | 52,478                                   |       | 79,107 |   |
|                                         |       | (735,048                                 | )          | (383,251 | ) |
|                                         |       |                                     |       |   |   |
| (Loss) before income taxes                   |       | (4,315,744                               | )          | (614,269 | ) |
|                                         |       |                                     |       |   |   |
| Income tax expense (benefit):                |       |                                     |       |   |   |
| Current                                      |       | 60,198                                   |       | 59,141 |   |
| Deferred                                     |       | (1,213,500                               | )          | (822,500 | ) |
|                                         |       | (1,153,302                               | )          | (763,359 | ) |
|                                         |       |                                     |       |   |   |
| Net income (loss)                            |       | $                                        | (3,162,442 | ) | $ | 149,090 |   |
|                                         |       |                                     |       |   |   |
| Earnings (loss) per common share:            |       |                                     |       |   |   |
| Basic                                        |       | $                                        | (0.47      | ) | $ | 0.02 |   |
| Diluted                                      |       | $                                        | (0.47      | ) | $ | 0.02 |   |
|                                         |       |                                     |       |   |   |
| Common shares and equivalents outstanding:   |       |                                     |       |   |   |
| Basic                                        |       | 6,748,717                                |       | 6,338,519 |   |
| Diluted                                      |       | 6,748,717                                |       | 6,458,198 |   |

 

See Notes to ConsolidatedFinancial Statements.

 

3

----

 

CRUZAN INTERNATIONAL, INC.

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(Unaudited)

 
| ** **                                                                            | ** ** | **Three Months Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                            | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
|                                                                                  |       |                                     |       |   |   |
| CASH FLOWS FROM OPERATING ACTIVITIES                                                  |       |                                     |       |   |   |
| Net income (loss)                                                                     |       | $                                        | (3,162,442 | ) | $ | 149,090 |   |
| Adjustments to reconcile net income (loss)  to net cash used in operating activities: |       |                                     |       |   |   |
| Stock options                                                                         |       | 110,884                                  |       | — |   |
| Depreciation                                                                          |       | 1,232,834                                |       | 1,220,500 |   |
| Amortization of trademarks and other assets                                           |       | 23,175                                   |       | 10,050 |   |
| Amortization of deferred loan costs                                                   |       | 260,609                                  |       | 84,463 |   |
| Equity in income of equity investees                                                  |       | (37,502                                  | )          | (32,291 | ) |
| Deferred income taxes                                                                 |       | (1,213,500                               | )          | (822,500 | ) |
| Changes in assets and liabilities:                                                    |       |                                     |       |   |   |
| (Increase) decrease in:                                                               |       |                                     |       |   |   |
| Receivables                                                                           |       | 1,623,123                                |       | 1,837,052 |   |
| Inventories                                                                           |       | (1,376,314                               | )          | (1,266,110 | ) |
| Other current assets                                                                  |       | (178,473                                 | )          | 97,414 |   |
| Increase (decrease) in:                                                               |       |                                     |       |   |   |
| Accounts payable                                                                      |       | (3,864,829                               | )          | (1,537,039 | ) |
| Accrued expenses                                                                      |       | (1,867,080                               | )          | (2,473,959 | ) |
| Other liabilities                                                                     |       | 244,647                                  |       | 172,679 |   |
| Net cash used in operating activities                                                 |       | (8,204,868                               | )          | (2,560,651 | ) |
|                                                                                  |       |                                     |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES                                                  |       |                                     |       |   |   |
| Principal payments received on notes  receivable                                      |       | 85,526                                   |       | 36,079 |   |
| Purchase of property and equipment                                                    |       | (171,542                                 | )          | (649,864 | ) |
| Advance to equity investee                                                            |       | —                                   |       | (250,000 | ) |
| Other                                                                                 |       | 125,773                                  |       | 21,430 |   |
| Net cash provided by (used in) investing  activities                                  |       | $                                        | 39,757     |   | $ | (842,355 | ) |

 

4

----

 
| ** **                                            | ** ** | **Three Months Ended December 31,** | ** ** |
|-------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                            | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
|                                                  |       |                                     |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                  |       |                                     |       |   |   |
| Net borrowings on line of credit                      |       | $                                        | 3,400,000  |   | $ | 4,100,000 |   |
| Proceeds from issuance of common stock                |       | 11,747                                   |       | — |   |
| Proceeds from long-term borrowings                    |       | 30,000,000                               |       | — |   |
| Disbursements for loan costs                          |       | —                                   |       | (109,000 | ) |
| Principal payments on long-term borrowings            |       | (24,000,000                              | )          | (1,047,621 | ) |
| Net cash provided by financing activities             |       | 9,411,747                                |       | 2,943,379 |   |
|                                                  |       |                                     |       |   |   |
| Net increase (decrease) in cash and cash  equivalents |       | 1,246,636                                |       | (459,627 | ) |
|                                                  |       |                                     |       |   |   |
| Cash and cash equivalents:                            |       |                                     |       |   |   |
| Beginning                                             |       | 3,565,282                                |       | 3,617,582 |   |
| Ending                                                |       | $                                        | 4,811,918  |   | $ | 3,157,955 |   |
|                                                  |       |                                     |       |   |   |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION     |       |                                     |       |   |   |
| Cash payments for:                                    |       |                                     |       |   |   |
| Interest                                              |       | $                                        | 577,232    |   | $ | 423,949 |   |
| Income taxes                                          |       | $                                        | 52,300     |   | $ | 27,710 |   |

 

See Notes toConsolidated Financial Statements.

 

5

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CRUZAN INTERNATIONAL, INC.

 

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note1.       Basis of Presentation

 

The consolidated financial statements included herein have beenprepared by the Company, without audit, pursuant to the rules andregulations of the Securities and Exchange Commission.  Certain information and footnote disclosuresnormally included in financial statements prepared in accordance withaccounting principles generally accepted in the United States of America havebeen condensed or omitted pursuant to such rules and regulations.  In the opinion of management, alladjustments, consisting only of normal recurring adjustments necessary for afair presentation of the financial information for the periods indicated, havebeen included.  For further informationregarding the Company’s accounting policies, refer to the consolidatedfinancial statements and related notes included in the Company’s Annual Reporton Form 10-K for the year ended September 30, 2005.

 

At December 31, 2005, the Company has two stock option plans forthe grant of options to key employees. On February 24, 2005, the Company granted 549,000 options (whichleaves 304,000 options for future issuance) at an exercise price of $12.55 pershare which was the fair value at that date, and these options have anexpiration date occurring in ten years. These options vest quarterly over a four-year period.

 

In December 2004, the Financial Accounting Standards Board issuedStatement of Financial Accounting Standard (“SFAS”) No. 123R, *Share-Based Payment*. SFAS No. 123R requires the Company to measure the cost of employeeservices received in exchange for an award of equity instruments based on thegrant-date fair value of the award. Beginning October 1, 2005, the Company adopted SFAS No. 123R,using the modified prospective method, which requires the fair value of thestock options to be expensed during the vesting period.  During the quarter ended December 31,2005, the Company’s stock option expense was $110,884.  There would be no stock option expenserecognized had the Company accounted for stock options in accordance with SFAS No. 123Rfor the three months ended December 31, 2004. The Company estimates thatthe stock option expense for its fiscal year ended September 30, 2006 willbe approximately $444,000.

 

6

----

 

Note 2.       Inventories

 

The major components ofinventories are:

 
| ** **                 | ** ** | **December 31, 2005** | ** ** | **September 30, 2005** | ** ** |
|----------------------------|------------|----------------------------|------------|-----------------------------|------------|
| ** **                 | ** ** | **(Unaudited)**            | ** ** | ** **                  | ** ** |
|                       |       |                       |       |                        |       |
| Finished goods             |       | $                          | 16,633,703 |                        | $          | 16,045,708 |   |
| Work in process            |       | 1,039,614                  |       | 2,256,553                   |       |
| Raw materials and supplies |       | 14,985,805                 |       | 12,980,547                  |       |
|                       |       |                       |       |                        |       |
|                       |       | $                          | 32,659,122 |                        | $          | 31,282,808 |   |

 

Note3.       Financing Arrangements

 

Long-term debt consists ofthe following as of December 31, 2005:

 
| Term promissory note, unsecured, interest  based on the six-month LIBOR rate, plus a margin of 0.90%. The interest rate  at December 31, 2005 was 5.56%. Principal balance due December 15,  2006.                                                                                  |   | $          | 30,000,000 |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|------------|--------|
|                                                                                                                                                                                                                                                                                          |   |       |       |
| Revolving loans under a revolving  promissory note agreement, unsecured, interest based on the applicable LIBOR  rate, plus a margin of 0.90%. The blended interest rate at December 31,  2005 was 5.36%. The revolving promissory note agreement terminates on  December 15, 2006. |   | 8,000,000  |       |
|                                                                                                                                                                                                                                                                                          |   | 38,000,000 |       |
| Less current maturities                                                                                                                                                                                                                                                                       |   | 38,000,000 |       |
|                                                                                                                                                                                                                                                                                          |   | $          | —     |   |

 

In October 2001, the Company entered into a $70 million creditagreement, consisting of a $40 million term loan and a $30 million revolvingloan facility.  During March 2004,the credit agreement was amended to reduce the revolving loan facility to $15million.  In December 2004, thematurity of the credit agreement was modified to January 31, 2006.

 

InDecember 2005, the Company entered into a loan arrangement with V&Sconsisting of a $30 million term promissory note and a $10 million revolvingpromissory note, both of which are unsecured, bear interest at the applicableLIBOR rate plus 90 basis points and mature on December 15, 2006.  The notes are non-amortizing and have nofinancial covenant requirements.  TheCompany used the proceeds of these notes to refinance its previous creditagreement.

 

7

----

 

Note4.       Earnings (Loss) Per Common Share

 

Basic earnings (loss) percommon share are calculated by dividing net income (loss) by the average commonshares outstanding.  On a diluted basis,shares outstanding are adjusted to assume the exercise of stock options.

 
| ** **                                                                                           | ** ** | **Three Months Ended  December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                           | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
|                                                                                                 |       |                                      |       |   |   |
| Net income (loss)                                                                                    |       | $                                         | (3,162,442 | ) | $ | 149,090 |   |
| Determination of shares:                                                                             |       |                                      |       |   |   |
| Weighted average number of common shares  outstanding                                                |       | 6,748,717                                 |       | 6,338,519 |   |
| Shares issuable on exercise of stock  options, net of shares assumed to be purchased out of proceeds |       | *                                         |       | 119,679 |   |
| Average common shares outstanding for diluted  earnings per share computation                        |       | 6,748,717                                 |       | 6,458,198 |   |
|                                                                                                 |       |                                      |       |   |   |
| Earnings (loss) per common share:                                                                    |       |                                      |       |   |   |
| Basic                                                                                                |       | $                                         | (0.47      | ) | $ | 0.02 |   |
| Diluted                                                                                              |       | $                                         | (0.47      | ) | $ | 0.02 |   |

 

----

*The effect of stock options has not been included, as their effectwould have been anti-dilutive.

 

The Company’s Virgin Islands subsidiary, through the EconomicDevelopment Commission of the Government of the Virgin Islands of the UnitedStates, has received a 90% exemption from income taxes on operatingincome.  This exemption is effectivethrough September 2020.  The pershare effect of this exemption on earnings (on a diluted basis) was to increaseearnings per share by $0.04 and $0.06 for the three months ended December 31,2005 and 2004, respectively.

 

Note 5.       Segment andGeographical Information

 

The Company operates primarily in the beverage alcohol industry in theUnited States.  The Company reports itsoperating results in four segments:

 

Bulk Alcohol Products (rum, citrus brandy, citrus spirits, canespirits, fortified citrus wine, purchased distilled products and byproducts)

Premium Branded Spirits (primarily Cruzan Estate Rums and CruzanFlavored Rums)

Bottling Operations (contract bottling services and private labelproducts)

Vinegar and Cooking Wine (bulk vinegar, bulk cooking wine, vinegarstock and private label case goods)

 

The Company’s executive offices are located in West Palm Beach, Floridaand certain of the expenses of the Company’s executive offices are classifiedas Corporate Operations and are not allocated to the operating segmentsdescribed above.  These expenses includesalaries and related expenses, legal and professional fees, rent for officespace, utilities and insurance.

 

The accounting policies of the reportable segments are the same asthose referred to in Note 1 to the consolidated financial statements located inItem 8 of the Company’s Annual Report on Form 10-K for the year ended September 30,2005.  The Company evaluates theperformance of its operating segments based on income before income taxes,equity in income or loss of equity investees, interest income and interestexpense. Material intersegment sales and transfers have been eliminated.

 

8

----

 

 

Net sales and operating (loss) for the Company’s reportable segmentsfor the three months ended December 31, 2005 and 2004, were as follows:

 
| ** **                  | ** ** | **Three Months Ended   December 31,** | ** ** |
|-----------------------------|------------|--------------------------------------------|------------|
| ** **                  | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| ** **                  | ** ** | **(in thousands)**                         | ** ** |
| **Net Sales**               |       |                                       |       |   |   |
| Bulk Alcohol Products       |       | $                                          | 11,104     |   | $ | 9,943 |   |
| Premium Branded Spirits     |       | 5,769                                      |       | 5,817 |   |
| Bottling Operations         |       | 6,608                                      |       | 2,908 |   |
| Vinegar and Cooking Wine    |       | 4,966                                      |       | 5,524 |   |
|                        |       | $                                          | 28,447     |   | $ | 24,192 |   |
|                        |       |                                       |       |   |   |
| **Operating Income (Loss)** |       |                                       |       |   |   |
| Bulk Alcohol Products       |       | $                                          | 1,816      |   | $ | 3,571 |   |
| Premium Branded Spirits     |       | (3,729                                     | )          | (1,984 | ) |
| Bottling Operations         |       | (556                                       | )          | (1,176 | ) |
| Vinegar and Cooking Wine    |       | 274                                        |       | 569 |   |
| Corporate Operations        |       | (1,386                                     | )          | (1,211 | ) |
|                        |       | $                                          | (3,581     | ) | $ | (231 | ) |

 

Note 6.       SupplementalExecutive Retirement Plan

 

During the second quarter of fiscal 2004, the Company’s Compensationand Stock Option Committee approved a supplemental executive retirement planfor certain key executives of the Company. The Company has entered into life insurance contracts to provide futurecash proceeds in connection with these liabilities.  The plan is an unfunded plan within themeaning of SFAS No. 132 *EmployersDisclosures about Pensions and Other Post Retirement Benefits*.  The net periodic benefit cost for the threemonths ended December 31, 2005 and 2004, was as follows:

 
| ** **                | ** ** | **Three Months Ended  December 31,** | ** ** |
|---------------------------|------------|-------------------------------------------|------------|
| ** **                | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
| Service cost              |       | $                                         | 70,005     |   | $ | 66,041 |   |
| Interest cost             |       | 8,400                                     |       | 3,936 |   |
|                      |       |                                      |       |   |   |
| Net periodic benefit cost |       | $                                         | 78,405     |   | $ | 70,004 |   |

 

Note 7.       Income Taxes

 

The Company incurred losses for income tax purposes from its U.S.operations of $4.9 million and $2.0 million in the first quarter of 2005 and2004, respectively.  The Company hasrecorded an income tax benefit in the Company’s consolidated statement ofoperations and an asset on the Company’s consolidated balance sheet.

 

Note 8.       Change of Controland Merger Agreement

 

On June 3, 2005, the Company announced that Angostura, Ltd. (“Angostura”),the Company’s then controlling stockholder, had entered into a Stock PurchaseAgreement with V&S Vin & Sprit AB, a Swedish-based internationalwine and spirits company (“V&S”), pursuant to which V&S agreed topurchase Angostura’s controlling interest in the Company.  Upon the terms and subject to the conditionsset forth in the Stock Purchase Agreement, V&S agreed to purchase all4,294,583 shares of the Company’s common stock beneficially owned by Angostura,representing approximately 63.6% of the Company’s outstanding common stock, foran aggregate consideration of $121,837,320, or $28.37 per share.  V&S subsequently assigned its rights inthe Stock Purchase

 

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Agreement to The Absolut Spirits Company, Inc., a Delaware corporation(“ASCI”), its wholly-owned subsidiary. The purchase and sale closed on September 26, 2005.

 

On July 8, 2005, the Company announced that ASCI had submitted aproposed Agreement and Plan of Merger pursuant to which a wholly-ownedsubsidiary of ASCI would merge with and into the Company, and each issued shareof Company common stock not then owned by Angostura would be converted into theright to receive $28.37 in cash (the “ASCI Proposal”).

 

On September 30, 2005, the Company, ASCI, and Cruzan Acquisition, Inc.,a Delaware corporation and a direct, wholly-owned subsidiary of ASCI (“Sub”),entered into an Agreement and Plan of Merger (the “Merger Agreement”).  The Merger Agreement provides that, upon theterms and subject to the conditions set forth in the Merger Agreement, Sub willmerge with and into the Company (the “Merger”), with the Company continuing asthe surviving corporation.

 

On December 1, 2005, the Company filed a preliminary proxystatement and other relevant documents concerning the ASCI Proposal with theSecurities and Exchange Commission (the “Commission”) and intends to call aSpecial Meeting of its stockholders to vote on the Merger.

 

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**Item 2.       Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

**Forward-Looking Statements**

 

Management’s Discussion and Analysis contains “Forward-LookingStatements,” as defined in section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, asamended.  Forward-Looking Statements arestatements other than historical information or statements of current conditionand relate to future events or the future financial performance of the Company.  Some Forward-Looking Statements may beidentified by use of such terms as “believes,” “anticipates,” “intends” or “expects.”  Such Forward-Looking Statements involve knownand unknown risks, uncertainties and other factors that may cause the actualresults, performance or achievements of the Company to be materially differentfrom any future results, performance or achievements expressed or implied bysuch Forward-Looking Statements.  Forinformation concerning these factors and related matters, see “Risks that May AffectFuture Results” in Item 7, and “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” of the Company’s Annual Reporton Form 10-K for the fiscal year ended September 30, 2005.  The Company undertakes no obligation toupdate or revise any Forward-Looking Statements, whether as a result of newinformation, future events or otherwise.

 

**Introduction**

 

The following discussion and analysis summarizes the significantfactors affecting (i) consolidated results of operations of the Companyfor the three months ended December 31, 2005 compared to the three monthsended December 31, 2004 and (ii) financial liquidity and capitalresources.  This discussion and analysisshould be read in conjunction with the Company’s consolidated financialstatements and notes thereto included herein. Certain amounts presented in this Item 2 have been rounded to thenearest thousand or hundred thousand, as applicable, but the percentagescalculated are based on actual amounts without rounding.

 

Market share and industry data and rankings disclosed in this reporthave been obtained from industry and government publications, as indicated; theCompany has not independently verified this information, although managementbelieves such data and rankings to be reasonably accurate.

 

Management believes that the Company is the largest supplier of bulkrum in the United States based on reports of U.S. Imports for Consumptionprepared by the Department of Census and that the Company’s market share ofbulk rum products in the United States is more than 90%.  Management believes that the Company is thelargest supplier of fortified citrus wine in the United States and is not awareof any other domestic suppliers of fortified citrus wine.  Management is aware of only one other UnitedStates manufacturer of citrus brandy and citrus spirits and believes that theCompany’s market share for these products is approximately 80% and 60%,respectively.

 

The Company’s primary spirits brand is Cruzan Rum, which is thefourth-largest premium rum brand in the United States according to statisticspublished by Impact Databank and Adams Liquor Handbook, two leading spiritsindustry publications.

 

The Company’s higher margin cooking wine products are sold throughoutthe United States and Canada.  Althoughpublished data is not available, management is not aware of any competitors ofthe Company’s size and believes that the Company is the largest supplier ofcooking wine in the United States.

 

The Company operates primarily in the beverage alcohol industry in theUnited States.  The Company is a leadingproducer and supplier of rum, brandy, wine and spirits to other beveragealcohol manufacturers; produces, imports and markets premium branded spirits;bottles beverage alcohol and other beverages on a contract basis and under itsown labels; and produces vinegar and cooking wine.  The Company reports its operating results infour segments:  Bulk Alcohol Products(rum, citrus brandy, citrus spirits, cane spirits, fortified citrus wine,purchased distilled products and byproducts); Premium Branded Spirits(primarily Cruzan Estate Rums and Cruzan Flavored Rums); Bottling Operations(contract bottling services and private label products); and Vinegar andCooking Wine (bulk vinegar, bulk cooking wine, vinegar stock and private labelcase goods).

 

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The Company’s executive offices are located in West Palm Beach, Floridaand certain of the expenses of the Company’s executive offices are notallocated to the operating segments described above.  The expenses of the Company’s corporateoperations include salaries and related expenses, legal and professional fees,rent for office space, utilities and insurance.

 

Information regarding the net sales and operating income (loss) of eachof the Company’s business segments is set forth in Note 5 to the consolidatedfinancial statements and in Table 2 included in this Item 2.

 

TheCompany’s net sales and gross margins (gross profit as a percentage of netsales) vary depending on the mix of business among the Company’s products.  Historically, gross margins have been highestin bulk alcohol products and premium branded spirits and lower in bottlingoperations and vinegar and cooking wine operations.  Within its bottling operations, sales andgross margins have varied substantially based upon the mix of business from theCompany’s “Type A” and “Type B” bottling customers.  Type A bottling customers pay the Company topurchase their raw materials and these costs are passed through to thecustomer.  Type B bottling customerssupply their own raw materials and are only charged for bottling charges.  Although gross profit per case for theCompany’s Type A and Type B bottling customers is approximately equal, giventhe same case volume, net sales and cost of goods sold with respect to productsbottled for Type A bottling customers are higher, and gross margins are lower,than for Type B bottling customers.  As aresult, significant fluctuations in volume of Type A bottling customers can distortthe Company’s gross margin.

 

The size and timing of purchase orders and product shipments can causeoperating results to fluctuate significantly from quarter to quarter,particularly since some customers purchase bulk alcohol products in significantquantities at one time or place significant orders at one time for contractbottling services, distilled spirits, vinegar and cooking wine.  Additionally, some Company products generatehigher profit margins than others, and changes in the Company’s product mix cancause gross margins to fluctuate. Certain aspects of the Company’s business are seasonal, with increaseddemand for the Company’s contract bottling services from April to October andincreased production of the Company’s bulk alcohol products from November toJune, corresponding to the Florida citrus harvest.  As a result of these factors, the Company’soperating results may vary significantly from quarter to quarter.

 

Net sales represent the Company’s gross sales less excise taxes. Excisetaxes are generally payable on sales of certain of the Company’s bulk alcoholproducts and on all alcohol products bottled by the Company.  However, there are no excise taxes paid onsales made to customers that have tax permits. Accordingly, excise taxes may vary significantly from period to perioddepending upon the Company’s product and customer mix.

 

**Results of Operations**

 

Tables 1 and 2 below set forth statement of operations items as apercentage of net sales and information on net sales, gross profit (loss) andoperating income (loss) by operating segment.

 

**Table 1 – Statement of Operations as a Percent of Net Sales**

 
| ** **                                   | ** ** | **Three Months Ended  December 31,** | ** ** |
|----------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                   | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
| Net sales                                    |       | 100.0                                     | %          | 100.0 | % |
| Cost of goods sold                           |       | 76.4                                      |       | 66.6 |   |
| Gross margin                                 |       | 23.6                                      |       | 33.4 |   |
| Selling, general and administrative expenses |       | 36.1                                      |       | 34.4 |   |
| Operating (loss)                             |       | (12.5                                     | )          | (1.0 | ) |
| Interest expense                             |       | (3.0                                      | )          | (2.4 | ) |
| Other income, net                            |       | 0.3                                       |       | 0.9 |   |
| Loss before income taxes                     |       | (15.2                                     | )          | (2.5 | ) |
| Income tax benefit                           |       | 4.1                                       |       | 3.1 |   |
| Net income (loss)                            |       | (11.1                                     | )%         | 0.6 | % |

 

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**Table 2 – Net Sales, Gross Profit (Loss) andOperating Income (Loss) by Operating Segment**

** **
| ** **                  | ** ** | **Three Months Ended  December 31,** | ** ** |
|-----------------------------|------------|-------------------------------------------|------------|
| ** **                  | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
| **Net Sales**               |       |                                      |       |   |   |
| Bulk alcohol products       | ** ** | $                                         | 11,104     |   | $ | 9,943 |   |
| Premium branded spirits     |       | 5,769                                     |       | 5,817 |   |
| Bottling operations         |       | 6,608                                     |       | 2,908 |   |
| Vinegar and cooking wine    |       | 4,966                                     |       | 5,524 |   |
| ** **                  |       | $                                         | 28,447     |   | $ | 24,192 |   |
|                        |       |                                      |       |   |   |
| **Gross Profit (Loss)**     |       |                                      |       |   |   |
| Bulk alcohol products       |       | 2,917                                     |       | 4,673 |   |
| Premium branded spirits     |       | 2,691                                     |       | 2,641 |   |
| Bottling operations         |       | 76                                        |       | (481 | ) |
| Vinegar and cooking wine    |       | 1,016                                     |       | 1,242 |   |
| ** **                  |       | $                                         | 6,700      |   | $ | 8,075 |   |
|                        |       |                                      |       |   |   |
| **Operating Income (Loss)** |       |                                      |       |   |   |
| Bulk alcohol products       |       | 1,816                                     |       | 3,571 |   |
| Premium branded spirits     |       | (3,729                                    | )          | (1,984 | ) |
| Bottling operations         |       | (556                                      | )          | (1,176 | ) |
| Vinegar and cooking wine    |       | 274                                       |       | 569 |   |
| Corporate operations        |       | (1,386                                    | )          | (1,211 | ) |
| ** **                  |       | $                                         | (3,581     | ) | $ | (231 | ) |

 

 

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Table 3 below provides unit sales volume data for certain Company products.

 

**Table 3 – Unit Sales Volume Data**

 
| ** **                           | ** ** | **Three Months Ended  December 31,** | ** ** |
|--------------------------------------|------------|-------------------------------------------|------------|
| ** **                           | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
| ** **                           | ** ** | **(in thousands )**                       | ** ** |
|                                 |       |                                      |       |   |   |
| Bulk alcohol products:               |       |                                      |       |   |   |
| Distilled products, in proof gallons |       |                                      |       |   |   |
| Citrus Brandy                        |       | 416                                       |       | 364 |   |
| Citrus Spirits                       |       | 113                                       |       | 195 |   |
| Rum                                  |       | 1,604                                     |       | 1,415 |   |
| Cane Spirits                         |       | 139                                       |       | 111 |   |
| Fortified wine, in gallons           |       | 3,241                                     |       | 2,880 |   |
| Premium branded spirits, in cases    |       | 134                                       |       | 140 |   |
| Bottling operations, in cases        |       | 816                                       |       | 580 |   |
| Vinegar                              |       |                                      |       |   |   |
| Bulk, in 100 grain gallons           |       | 938                                       |       | 1,249 |   |
| Cases                                |       | 136                                       |       | 164 |   |
| Drums, in 100 grain gallons          |       | 319                                       |       | 257 |   |
| Cooking Wine                         |       |                                      |       |   |   |
| Bulk, in gallons                     |       | 661                                       |       | 603 |   |
| Cases                                |       | 147                                       |       | 211 |   |

 

**Three months ended December 31, 2005compared to three months ended December 31, 2004**.  Unless otherwise noted, references to 2005 representthe three-month period ended December 31, 2005 and references to 2004represent the three-month period ended December 31, 2004.

 

*Net Sales.*Net saleswere $28.4 million in 2005, an increase of 17.6% from net sales of $24.2million in 2004.

 

Net sales of bulk alcohol products were $11.1 million in 2005, anincrease of 11.7% from net sales of $9.9 million in 2004.  The increase in net sales resulted primarilyfrom increased shipments of citrus brandy, rum, cane spirits and fortifiedwine, offset by decreased shipments of citrus spirits.  The increase in shipments of bulk alcoholproducts was due to the timing of customer orders.  The Company’s customers often purchase bulkalcohol products in significant quantities, and accordingly, the size and timingof purchase orders and product shipments can cause operating results tofluctuate significantly from quarter to quarter.  In 2005, unit sales of the Company’sfortified wine products increased 12.5% compared to 2004, although the averageselling price for the Company’s fortified wine decreased 1.4%.  The average selling prices for these bulkalcohol products decreased due to management lowering prices as a result ofincreased competition from other producers.

 

Net sales of premium branded spirits were $5.8 million in 2005, adecrease of 0.8% from net sales of $5.8 million in 2004.  Sales of the Company’s Cruzan Estate Rums andCruzan Flavored Rums increased 1.9% in 2005 compared to 2004.  Sales of Cruzan Rum were up only 1.9% due toone competitive suppliers aggressive wholesaler incentive program during thequarter and a reduction of our inventories at the wholesaler level.  Sales of Cruzan Estate Rums and CruzanFlavored Rums have increased from $2.2 million in fiscal 1996 to $25.5 millionin fiscal 2005.  During this time, theCruzan brand has been recognized as one of the fastest growing brands in thespirits industry by Impact Databank and Adams Liquor Handbook, two leadingbeverage industry publications.  Inaddition, the Cruzan Rums have won numerous tasting awards from severalprestigious beverage industry organizations, including The American TastingInstitute, The Beverage Tasting Institute and the San Francisco World SpiritsCompetition.  Since January 2003,several of the Company’s competitors have introduced their own lines offlavored rum products into the marketplace, which, in certain fiscal quarters,has negatively impacted the

 

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level of sales growth of Cruzan Flavored Rums.  Some of the Company’s competitors in the rumand flavored rum categories have significantly greater financial and otherresources than the Company, which could adversely affect the Company’s salesgrowth of Cruzan Estate Rums and Cruzan Flavored Rums. As a response to suchincreased competition, and in order to provide further impetus to the growth ofCruzan Estate Rums and Cruzan Flavored Rums, management significantly increasedits marketing budget in fiscal 2004 and fiscal 2005 in an effort to support thecontinued growth of the Company’s Cruzan brand. This increase in marketing expenses has increased the operating loss forthis business segment in fiscal 2004 and fiscal 2005.  Management intends to continue to increaseexpenditures in fiscal 2006 to maintain the growth of the Cruzan Rum brand.

 

Netsales of the Company’s bottling operations were $6.6 million in 2005, anincrease of 127.2% from net sales of $2.9 million in 2004.  The unit volume of the Company’s bottlingoperations increased 40.8% in 2005, and average unit prices increased61.4%.  The primary reason for theincrease in the average price per case was the addition in July 2005 of anew Type A bottling customer for which the Company supplies raw materials inaddition to a bottling charge.  Thecontract with this Type A customer is for five years, expiring July 2010,but can be terminated within 180 days during the first year and within 90 daysduring each year thereafter.  The Companyexpects to produce approximately 750,000 cases per year under this contract.

 

Net sales of vinegar and cooking wine were $5.0 million in 2005, adecrease of 10.1% from net sales of $5.5 million in 2004.  The decrease in shipments of certain vinegarand cooking wine products was due to the discontinuance of certain cooking wineand juice products of approximately $0.7 million, offset by increases due tothe timing of customer orders.  In 2005,total unit sales of vinegar and cooking wine decreased 11.4% compared to 2004,and the average selling price per unit increased 1.5%.  The average selling prices of vinegar andcooking wine increased due to a change in product mix.

 

*Gross Profit.* Grossprofit was $6.7 million in 2005, a decrease of 17.0% from gross profit of $8.1million in 2004.  During 2005, bulkalcohol gross profit decreased $1.8 million as a result of increased citrus rawmaterial costs; bottling operations gross profit improved $0.6 million as aresult of increased volume; and vinegar and cooking wine gross profit decreased$0.2 million due to decreased volume. Gross margin decreased to 23.6% in 2005 from 33.4% in 2004 as a resultof increased raw material costs.

 

*Selling, General and AdministrativeExpenses. *Selling,general and administrative expenses were $10.3 million in 2005, an increase of23.8% from $8.3 million in 2004.  Theincrease was primarily attributable to increased administrative, marketing andadvertising expenses of $1.8 million in the Company’s premium branded spiritsbusiness as the Company continues to place emphasis on this growing businesssegment.  During 2005, the Company hasincreased its selling, general and administrative expenses in its premiumbranded spirits segment in an effort to maintain the continued growth of theCompany’s Cruzan brand.  Also in 2005,the Company recognized $0.1 million of stock option expense in accordance withSFAS No. 123R.

 

OperatingLoss.  Table 2 sets forth the operatingloss by reportable segment of the Company for 2005 and 2004.  The Company’s operating loss was $3.6 millionin 2005, as compared to an operating loss of $0.2 million in 2004.  The Company’s premium branded spirits segmenthad operating losses of $3.7 million in 2005 and $2.0 million in 2004.  The operating losses reflect the Company’scontinuing efforts to increase market share by reinvesting this and othersegments’ gross profits in selling and marketing expenses.

 

TheCompany’s bottling operations segment reported an operating loss of $0.6million in 2005 and $1.2 million in 2004. The Company’s bottling operations had operating losses in recent fiscalyears as a result of a contraction in the ready-to-drink product category, forwhich the Company is a contract bottler, and in the Company’s private labelbusiness as a result of a loss of certain private label bottling customers.

 

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*Interest Expense.*Interestexpense was $0.9 million in 2005 and $0.6 million 2004.  The Company’s borrowings and rates wereslightly higher in 2005 compared to 2004.

 

*Income Tax Benefit.*During2005 and 2004, the Company incurred operating losses from its U.S. operationsand recorded an income tax benefit of $1.2 million and $0.8 million,respectively.  The Company’s VirginIslands subsidiary has a 90% exemption from U.S. Virgin Islands incometaxes.  The exemption is effectivethrough September 2020.  Inaddition, the Company benefited from the extraterritorial income exclusion in2005 and 2004.

 

**Financial Liquidity and Capital Resources**

 

**General**

 

The Company’s principal use of cash in its operating activities is forlabor, overhead and raw materials used in its manufacturing operations andpurchasing imported products for its premium branded spirits business.  The Company’s source of liquidity hashistorically been cash flow from operations and its line of credit.  Some of the Company’s manufacturingoperations are seasonal and the Company’s borrowings on its line of credit varyduring the year.

 

The Florida citrus harvest is generally performed during the monthsfrom November through June.  Themajority of the Florida citrus harvest is processed as fresh fruit juice orjuice concentrate.  A byproduct of citrusjuice production is citrus molasses which the Company uses as a raw material atits two Florida distilleries to produce citrus brandy and spirits.  Due to the seasonal availability and short “shelf-life”of the citrus molasses raw material, the Company produces its estimated annualcustomer requirements during a seven-month period, and therefore, carries ahigher than normal level of inventory in relation to sales during thisseven-month period.  Generally, theCompany’s inventory level increases during this seven-month period anddecreases after the citrus harvest ends when the Company supplies its customerswith citrus brandy and spirits from inventory from July through October.

 

There are no minimum aging requirements under federal regulations forcane spirits products to be designated rum. However, due to the Company’s highquality standards, the Company ages its Cruzan Estate Rums for two to fiveyears and certain of the Company’s super premium rums are aged up to twelveyears. Due to the Company’s own aging requirements, production of Cruzan EstateRums is scheduled to meet demand two to three years in the future.  Accordingly, inventories are larger inrelation to sales and total assets than for other branded spirits companiesthat do not age their products. Management expects to continue to increase theCompany’s inventory of barrel aged rums to meet projected increased sales inthe future.

 

The Company’s contract bottling services business is seasonal.  Demand for contract bottling services ishighest from April through October. During these months the Company’s requirements increase for ingredients,glass bottles, caps, labels, packaging materials and labor.

 

During fiscal 2005, management increased selling, general andadministrative expenses in its premium branded spirits segment in an effort tomaintain the growth of the Company’s Cruzan Rum brand.  Management intends to continue to increaseexpenditures in fiscal 2006 to maintain the growth of the Cruzan Rumbrand.  To the extent that the increasedexpenditures do not result in increased sales of the Cruzan brand, the Company’sshort-term liquidity may be adversely affected. However, management actively monitors sales and expenditures on anongoing basis, and retains the ability to adjust its level of expenditures inresponse to market conditions and in order to maintain sufficient liquidity.

 

Management believes that cash provided by its operating and financing activitieswill provide adequate resources to satisfy its working capital, liquidity andanticipated capital expenditure requirements for both its short-term andlong-term capital needs.

 

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**Operating Activities**

 

Net cash used in operating activities in 2005 was $8.2 million, whichresulted from $2.8 million in net loss adjusted for noncash items, and $5.4million representing the net increase in operating assets and liabilities.

 

**Investing andFinancing Activities**

 

Net cash provided by investingactivities in 2005 was less than $0.1 million, which resulted primarily fromprincipal payments received on notes receivable of $0.1 million, offset by $0.2million of capital expenditures.

 

Net cash provided by financingactivities in 2005 was $9.4 million, which resulted primarily from proceeds oflong-term debt.

 

In October 2001, the Companyentered into a $70 million credit agreement, consisting of a $40 million termloan and a $30 million revolving loan facility.  In March 2004, the revolving loanfacility was reduced to $15 million.  Thecredit agreement was due to expire in January 2006.

 

InDecember 2005, the Company entered into a loan arrangement with V&Sconsisting of a $30 million term promissory note and a $10 million revolvingpromissory note, both of which are unsecured, bear interest at the applicableLIBOR rate plus 90 basis points and mature on December 15, 2006.  The notes are non-amortizing and have nofinancial covenant requirements.  TheCompany used the proceeds of these notes to refinance its previous creditagreement.

 

The Company’s interest bearingindebtedness was $38.0 million as of December 31, 2005, and its ratio oftotal debt to equity was 0.67 to 1.

 

The Company’s share of theundistributed earnings of the Bahamian and Virgin Islands subsidiaries wasapproximately $47.5 million as of September 30, 2005.  No provision has been made for taxes whichwould result from the remittance of such undistributed earnings, as the Companyintends to reinvest these earnings indefinitely.  See Note 10 to the Company’s consolidatedfinancial statements included in the Company’s Annual Report on Form 10-Kfor the year ended September 30, 2005 for additional information on incometaxes related to these subsidiaries.

 

Based on current plans and businessconditions, management expects that its cash, cash equivalents, and short-terminvestments, together with any amounts generated from operations and availableborrowings, will be sufficient to meet the Company’s cash requirements for atleast the next 12 months.

 

**Effects of Inflation and Changing Prices**

 

The Company’s results of operationsand financial condition have not been significantly affected by inflation andchanging prices.  The Company has beenable, subject to normal competitive conditions, to pass along rising coststhrough increased selling prices.

 

**Change of Control and MergerAgreement**

 

On June 3, 2005, the Companyannounced that Angostura, the Company’s then controlling stockholder, hadentered into a Stock Purchase Agreement with V&S, pursuant to which V&Sagreed to purchase Angostura’s controlling interest in the Company.  Upon the terms and subject to the conditionsset forth in the Stock Purchase Agreement, V&S agreed to purchase all4,294,583 shares of the Company’s common stock beneficially owned by Angostura,representing approximately 63.6% of the Company’s outstanding common stock, foran aggregate consideration of $121,837,320, or $28.37 per share.  V&S subsequently assigned its rights inthe Stock Purchase Agreement to ASCI, its wholly-owned subsidiary.  The purchase and sale closed on September 26,2005.

 

On July 8, 2005, the Companyannounced that ASCI had submitted a proposed Agreement and Plan of Mergerpursuant to which a wholly-owned subsidiary of ASCI would merge with and intothe Company, and each

 

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issued share of Company common stock not then owned by Angostura wouldbe converted into the right to receive $28.37 in cash.

 

On September 30, 2005, theCompany, ASCI, and Sub, entered into the Merger Agreement.  The Merger Agreement provides that, upon theterms and subject to the conditions set forth in the Merger Agreement, Sub willmerge with and into the Company, with the Company continuing as the survivingcorporation.

 

On December 1, 2005, the Companyfiled a preliminary proxy statement and other relevant documents concerning theASCI Proposal with the Commission and intends to call a Special Meeting of itsstockholders to vote on the Merger.

 

On January 19, 2006, and on February 8,2006, the Company filed and amended preliminary proxy statement and otherrelevant documents in response to Commission comments.

 

**Critical Accounting Policies**

 

The Company’s significant accountingpolicies are more fully described in Note 1 to the Company’s consolidatedfinancial statements located in Item 8 of its Annual Report on Form 10-Kfor the year ended September 30, 2005. The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets, liabilities, revenues, and expenses, and the related disclosures ofcontingent assets and liabilities. Actual results could differ from thoseestimates under different assumptions or conditions. The Company believes thatthe following critical accounting policy is subject to estimates and judgmentsused in the preparation of its consolidated financial statements:

 

The Company has goodwill andintangible assets associated with business acquisitions. The Company reviewsthese assets for impairment annually and whenever an event occurs orcircumstances change that would more likely than not reduce the fair value ofthese assets below their carrying value. If the fair value of these assets is less than their carrying value,then an impairment loss would be recognized equal to the excess of the carryingvalue over the fair value of the asset.

 

**Off-Balance Sheet Arrangements**

 

The Company has no off-balance sheetarrangements that have or are reasonably likely to have a current or futureeffect on the Company’s financial condition, changes in financial condition,revenues or expenses, results of operations, liquidity, capital expenditures orcapital resources that are material to investors.

 

**Item 3.       Quantitativeand Qualitative Disclosures About Market Risk**

 

The information required under thisItem 3 is incorporated herein by reference to the Company’s Annual Report on Form 10-Kfor the year ended September 30, 2005. As of December 31, 2005, there have been no material changes to theinformation provided therein.

 

**Item 4.       Controlsand Procedures**

 

**Evaluation of Disclosure Controls andProcedures**

 

The Company maintains disclosurecontrols and procedures (as defined in Rule 13a-15(e) under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”) that aredesigned to ensure that information required to be disclosed in the Company’sreports under the Exchange Act are recorded, processed, summarized and reportedwithin the time periods specified in the Commission’s rules and forms, andthat the information is accumulated and communicated to the Company’smanagement, including the Company’s Chief Executive Officer and Chief FinancialOfficer, as appropriate, to allow timely decisions regarding requireddisclosure.  In designing and

 

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evaluating the disclosure controls and procedures, managementrecognized that any disclosure controls and procedures, no matter how welldesigned and operated, can provide only reasonable assurance of achieving thedesired objectives, and management was required to apply its judgment inevaluating the cost-benefit relationship of possible disclosure controls andprocedures.  The Company’s management,with the participation of the Company’s Chief Executive Officer and ChiefFinancial Officer, has evaluated the effectiveness of the design and operationof the Company’s disclosure controls and procedures as of the end of the periodcovered by this report.  Based upon thatevaluation, the Company’s Chief Executive Officer and Chief Financial Officerconcluded that the design and operation of the Company’s disclosure controlsand procedures provided reasonable assurance that the disclosure controls andprocedures are effective to accomplish their objectives.

 

**Changes in Internal Control Over FinancialReporting**

 

In addition, management, includingthe Company’s Chief Executive Officer and Chief Financial Officer, reviewed theCompany’s internal control over financial reporting (as defined in Rule 13a-15(f) underthe Exchange Act), and there have been no changes in the Company’s internal controlsduring the first quarter of fiscal 2006 that has materially affected, or isreasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

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**PART II.  OTHER INFORMATION**

 

**Item6.       Exhibits**

** **
| 11.1   |   | Statement  of Computation of Per Share Earnings (1)                                                                                                                     |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                    |
| 20.1   |   | Earnings  press release for the three-month period ended December 31, 2005 (2)                                                                                     |
|   |   |                                                                                                                                                                    |
| 31.1   |   | Certification of Jay S. Maltby, Chief Executive Officer and  President, pursuant to Rule 13a-14(a) of the Securities Exchange  Act of 1934 (2)                |
|   |   |                                                                                                                                                                    |
| 31.2   |   | Certification of Ezra Shashoua, Executive Vice President  and Chief Financial Officer, pursuant to Rule 13a-14(a) of the  Securities Exchange Act of 1934 (2) |
|   |   |                                                                                                                                                                    |
| 32.1   |   | Certification of Jay S. Maltby, Chief Executive Officer and  President, pursuant to 18 U.S.C. Section 1350 (2)                                                     |
|   |   |                                                                                                                                                                    |
| 32.2   |   | Certification of Ezra Shashoua, Executive Vice President  and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350 (2)                                      |

 

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| (1)    | Filed  herewith and incorporated herein by reference to Note 4 of notes to consolidated  financial statements, included in Item 1 of the Company’s Quarterly Report on  Form 10-Q for the quarter ended December 31, 2005. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                      |
| (2)    | Filed  herewith.                                                                                                                                                                                                                          |

 

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**Signatures**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
| Date:  February 13, 2006 | /s/  Jay S. Maltby                                    |   |
|-------------------------------|-------------------------------------------------------|--------|
|                          | Jay S.  Maltby                                        |
|                          | Chief  Executive Officer and President                |
|                          |                                                  |
|                          |                                                  |
| Date:  February 13, 2006 | /s/  Ezra Shashoua                                    |   |
|                          | Ezra  Shashoua                                        |
|                          | Executive  Vice President and Chief Financial Officer |

 

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